Pricing Money: A beginner's guide to money, bonds, futures and swaps • Hacker News Board

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#81

Post by mo_42 » Fri, Jun 16, 2023, 9:48 PM UTC

HWR_14 wrote: post #78

mo_42 wrote: post #62

Earlier quoted context omitted.

> Where is the productive output of all these arbitrage shell games? How is this more than an abysmal waste of time and resources simply to make a small handful of bankers richer? If shares of companies are valued at fair prices it means that the finance departments for that companies can raise more capital. So companies that bring value to society should be able to expand their business. At the same time, regular pe…

> If shares of companies are valued at fair prices it means that the finance departments for that companies can raise more capital. This only true of companies that were underpriced. Overpriced companies, either because of hype (Pets.com), fraud (Enron) or other reasons (maybe Jim Cramer issued a buy) do not benefit from a fairer price.

I guess this could go in both directions. There are also underpriced companies.

I know that some people knew that something was wrong with Wirecard and they short sold the stock.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#82

Post by dataflow » Fri, Jun 16, 2023, 9:48 PM UTC

HWR_14 wrote: post #74

dataflow wrote: post #59

Earlier quoted context omitted.

I get why farmers do it but what's the societal benefit of letting a rando like me buy and sell (i.e. make bets on) such contracts? Do farmers really prefer that random people do this?

Theoretically, the societal benefit of lettings randos buy and sell contracts is that there is (a) better price discovery and (b) better liquidity. There are probably theoretical counterarguments to both of those points, but it's hard to see alternative systems that provide either or both those features. At a basic level, obviously thee needs to be someone assuming the price risk from the farmers, and those people wi…

I buy that there's some benefit, but I don't buy that it's significant. And I don't see any reason why I should believe this provides a net benefit to society. Sure it saves the original parties some money, but then a bunch of unrelated parties come in and siphoning money from the existing parties. Why should I believe this is net-benefiting society?

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#83

Post by opportune » Fri, Jun 16, 2023, 9:54 PM UTC

panarchy wrote: post #38

lolpython wrote: post #24

Earlier quoted context omitted.

Farmers use futures contracts to protect against price risks [0]. As do energy suppliers [1]. [0] https://www.ers.usda.gov/webdocs/publications/99518/eib-219.... [1] https://emp.lbl.gov/publications/primer-electricity-futures-...

Why is it that every time someone mentions futures trading someone comes along to drop the farmer's crops example, do y'all really have no other examples? What percentage of futures trading is on farmers crops? What about the crops they destroy because they would be less profitable? Does the protection against monetary risk outweigh starving people to death? How well will it work if we create unsustainable land that…

Because that’s what futures are for? Consumers and producers of commodities want to lock in prices to lower the risk of price fluctuations in the future.

>what about the crops they destroy

This has nothing to do with the discussion

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#84

Post by alphanullmeric » Fri, Jun 16, 2023, 9:54 PM UTC

scubbo wrote: post #66

alphanullmeric wrote: post #53

Earlier quoted context omitted.

Sounds like you worry too much about what other people do with their own time and money.

When it results in a concentration of wealth in the hands of people who can abuse it for political ends, or results in market crashes that cause knock-on impact to real humans - then yes, worrying about it is reasonable and justified.

Feel free to not trade in this market then. “Mom they won’t share” is also not a particularly convincing way to justify the right to other people’s money.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#85

Post by jdaw1 » Fri, Jun 16, 2023, 9:56 PM UTC

tech_ken wrote: post #17

This is an excellent resource and a great read, but DAMN do money markets seem stupid as all get out to me. Where is the productive output of all these arbitrage shell games? How is this more than an abysmal waste of time and resources simply to make a small handful of bankers richer?

I’m the author. Thank you for saying it is an excellent read — that was no small amount of work.

You ask “Where is the productive output of all these arbitrage shell games?”, which is a very fair question. The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them. E.g., you are not the optimal person to hold the risk that, through no fault of your own, your house burns down. That risk exists, and you are not the optimal holder of it. Hence insurance. A Lincolnshire farmer — and yes, I like the non-abstract solidly of the example — is not the optimal holder of the ‘risk’ that the Australian and Kansas wheat harvests are super-bountiful. Markets allow that risk to be transferred to a non-farmer better able to hold the risk.

Of course, with markets come some ‘unproductive’ stuff. Likewise, democracy is good, but that is not necessarily praising the optimality of all parts of campaign finance legislation.

Let me also mention that I am the author of the definitive reference book on old Vintage Port: Port Vintages (and seemingly the board disallows a link).

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#86

Post by OJFord » Fri, Jun 16, 2023, 9:57 PM UTC

dataflow wrote: post #59

lolpython wrote: post #24

Earlier quoted context omitted.

Farmers use futures contracts to protect against price risks [0]. As do energy suppliers [1]. [0] https://www.ers.usda.gov/webdocs/publications/99518/eib-219.... [1] https://emp.lbl.gov/publications/primer-electricity-futures-...

I get why farmers do it but what's the societal benefit of letting a rando like me buy and sell (i.e. make bets on) such contracts? Do farmers really prefer that random people do this?

In general/basics/origins, farmers only want to sell futures, because they actually have (intend to have) the commodity for physical delivery, and do want to physically deliver it.

So who is on the buy-side? Exclusively supermarkets/distributors, while exclusively farmers sell? I suppose that could work, but I assume it would quickly regress into tight relationships like we have (probably regionally variable) for smaller market's, like most vegetables (vs grain) where as I understand it it's largely a direct relationship with the buyer - you probably still sell a future contract, but it's not via a central market and it is 'farm x will deliver to buyer y', i.e. a pre-order if you will, not really a commodity.

And as others say, price discovery, liquidity. What harm does completely open (no obligation) do? And maybe you eat a lot of potatoes and want to lock in the price today. (Or more seriously maybe you're a big baker, but not big enough to be buying direct from farm, your miller is. So grain price affects you, but ypu can't directly control/choose when to take it. Secondary grain futures allow you to hedge risk of it moving against you. In turn this means lower prices or lower risk of shock price increase to your consumers.)

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#87

Post by nostrademons » Fri, Jun 16, 2023, 9:59 PM UTC

tech_ken wrote: post #17

This is an excellent resource and a great read, but DAMN do money markets seem stupid as all get out to me. Where is the productive output of all these arbitrage shell games? How is this more than an abysmal waste of time and resources simply to make a small handful of bankers richer?

Prices and financial markets in general exist solely for information transmission. The central problem of economics is "How do you produce the things that your population needs, in the quantity and at the time they need them, as efficiently as possible?" This is why every centrally-planned economy eventually fails, and why we were stuck in the feudal middle ages for a millennia. Information (and incentives) about what to produce and how to produce it efficiently weren't getting to the population at large, which caught us in a local subsistence minima. Financial markets give all the players an incentive (in the form of profit) to transmit information (in the form of prices) from people who want goods to people who can supply them.

This is also behind the theory of why certain forms of financial transactions are legal and others are illegal. Arbitrage = legal, because it converges prices in two separate markets in a way that gives producers in both those markets better information about true demand. Futures markets = legal, because they smooth out temporal fluctuations in demand so that producers only have to worry about producing, while also incentivizing the construction of just enough storage & buffering to hold that product. Pump & dump schemes = illegal, because they distort price information in the market in an unsustainable way and then leave later participants to bear the cost of this. Same with Ponzi schemes. Equities markets = legal, because they transmit information about the overall cost of capital within the economy to firms, which can then use it to decide the profitability or unprofitability of various investments.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#88

Post by nostrademons » Fri, Jun 16, 2023, 10:04 PM UTC

jdaw1 wrote: post #85

tech_ken wrote: post #17

This is an excellent resource and a great read, but DAMN do money markets seem stupid as all get out to me. Where is the productive output of all these arbitrage shell games? How is this more than an abysmal waste of time and resources simply to make a small handful of bankers richer?

I’m the author. Thank you for saying it is an excellent read — that was no small amount of work. You ask “Where is the productive output of all these arbitrage shell games?”, which is a very fair question. The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them. E.g., you are not the optimal person to hold the risk that, through no fault of your…

Note also that in some cases you might be the optimal person to hold the risk that your house burns down, if, for example, your liquid net worth is 100x the replacement cost of your home. And that's illustrative of the value of markets: you can choose to transact in them, depending on your personal circumstances. The insurance market exists because for the vast majority of people, rebuilding their home is not feasible with their current net worth. But for a small number of people it might be, and for a small number of firms it's probably worth it to insure many thousands of people, and then you can even slice up the shares of those insurance firms and sell them on the stock market so that the risk of your house burning down gets socialized across all the other shareholders but at the same time you have a stake in the profits.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#89

Post by lend000 » Fri, Jun 16, 2023, 10:06 PM UTC

tech_ken wrote: post #17

This is an excellent resource and a great read, but DAMN do money markets seem stupid as all get out to me. Where is the productive output of all these arbitrage shell games? How is this more than an abysmal waste of time and resources simply to make a small handful of bankers richer?

The output (generally speaking, not specific to money markets) is better prices. There are large scale examples of economies in which prices were mismanaged either due to lack of information/technology or centrally planned prices, some of which resulted in failed states (e.g. Venezuela and the Soviet Union). While providing market information signals via prices is certainly an abstract concept that most people will never appreciate, it is important regardless.

For complex instruments in money markets, the main effects are bridging mis-priced treasuries on different time frames and hedging against various outcomes for pensions, banks, and dealers in physical commodities.

Most of the complex stuff either serves one of those purposes or becomes a zero sum game that doesn't affect non-participants. It's important to judge each instrument by its purpose and mechanism rather than bunch everything as a way to make bankers richer (e.g. a future vs. a CDO).

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#90

Post by lbotos » Fri, Jun 16, 2023, 10:07 PM UTC

dataflow wrote: post #82

HWR_14 wrote: post #74

Earlier quoted context omitted.

Theoretically, the societal benefit of lettings randos buy and sell contracts is that there is (a) better price discovery and (b) better liquidity. There are probably theoretical counterarguments to both of those points, but it's hard to see alternative systems that provide either or both those features. At a basic level, obviously thee needs to be someone assuming the price risk from the farmers, and those people wi…

I buy that there's some benefit, but I don't buy that it's significant. And I don't see any reason why I should believe this provides a net benefit to society. Sure it saves the original parties some money, but then a bunch of unrelated parties come in and siphoning money from the existing parties. Why should I believe this is net-benefiting society?

Your viewpoint here is kinda weird?

The more something trades, the more likely we will have the right price. When things don't trade as much, we don't actually know what that thing is worth.

This concept is a benefit to society as many things are interconnected and correlated, so the more accurate we can quickly find the current price (and expected future price) the more we can evaluate value.

(Also, they aren't "siphoning money" really it's "value" because the contract isn't actually money)